Sunday, February 10, 2008

What's there to lose?

You may notice my new widget at the top of the blog. It is a plug for Kiva, a charitable organization that I have just discovered and thought more people should know about.

Kiva works on the principles of microcredit. You may recall reading about microcredit in 2006. That is when the founder of a major microcredit organization, Muhammad Yunus, was given the Nobel Peace Prize for advancing the concept of microcredit.

Essentially, microcredit is the provision of small loans to entrepreneurs in third world countries to help them finance their businesses. Through provision of these small loans, these entrepreneurs are able to grow their enterprises and lift themselves out of abject poverty.

So where does Kiva come in? Think about it: if you were inclined to lend your money to a third world entrepreneur how would you go about finding one? Furthermore, consider all of the potential barriers to getting your cash to that person and than getting it back in repayment. It is just too much to consider and so the idea would never take off. Plus, the big financial institutions are not going to get involved because the amounts involved are just too small and they consider such borrowers to be much too high risk.

Kiva basically connects lenders (you and me) with entrepreneurs and facilitates the transfer of money. The entrepreneurs register with local microcredit organizations who then partner with Kiva. The entrepreneurs are screened so as to ensure maximum probability of repayment. Their businesses, personal profile, and fundraising goals are all listed on Kiva.org. If you find someone you think will benefit from your cash you can lend them as little as $25. It is all done online through PayPal (who waive their normal fees in this case).

Once the contributions from you and other lenders around the world reach the goal, the money is then given to the entrepreneur by the microcredit organization. The repayment agreement then starts. So in the case of the Azerbaijani man I lent $25 to grow his hardware store, he has 10 months to pay back the $1500 he received in total and each month he is supposed to pay back a portion of that. The credit organization does require the borrower to pay them interest, the specific percentage of which is stated in each organization's profile on Kiva.org. However, as a lender, you do not get to charge interest. It is just too legally complex. But you do get all your principal back. When it is repaid you can choose to then give it to another entrepreneur or withdraw it.

Brilliant right? But what if the borrower defaults on the loan? Well in the case of Kiva, if an entrepreneur you lend to defaults, you are just plain unlucky. They've lent over $25 million since inception and the default rate is only 0.14%. That is pretty good. Human nature won the day with me though, so I decided that $25 was a good start to test the waters.

Anyways, thought people would be interested in this. What do you think of the idea?

2 comments:

Stephanie said...

I love that idea. So many people don't like to donate to charitable organizations with the excuse that they don't know where their money is really going. I think this takes care of that quite nicely.

cheezewhizandmustard said...

It seems a very good idea to target your charitable donations to specific people of your choosing, which is not always easy to do.
Are these donations tax deductible?